What is the Investment Process- a Loser’s Game?
Navigating Investment Risks and Legal Boundaries in Montana Local Government Finance
Investment of public funds can be a highly complex area of responsibility for municipal officials with little or no formal investment training or experience and it is not always clear which investments are permissible under the law. Two Attorney General’s Opinions, 42 Op. Attorney Gen. No. 25 (1987) and 44 Op. Attorney Gen. No. 22 (1981), have answered some questions. However, while the Attorney General’s Opinions are meant to interpret the law and add clarity, the information is still decidedly technical and difficult to understand for most officials.
It is quite common for local officials to receive phone calls from investment firm representatives promising attractive rates of return on their investments. The representative may or may not understand the investments they are trying to sell or their inherent risks. Even more likely, the investment representative will not know which types of investments are permissible for Montana local governments. Unfortunately, some finance officials have
fallen victim to illusions of earning high rates of return for their taxpayers and invested public funds in risky investments that have resulted in substantial losses to their local government.
One unnamed author wrote:
Imagine the following two scenarios:
1. The city clerk‐treasurer, through his/her diligent cash management efforts, increased the city’s investment earnings from $30,000 per year to $40,000 per year; or
2. The city clerk-treasurer, in an attempt to increase the city’s investment income, invested the city’s funds in an illegal investment instrument. The investment is in default and it is likely the city will lose the original principal amount of $10,000.
Which of the two preceding events would result in a headline in the local newspaper? Quite obviously, the prospect of a city or town losing money by investing in an illegal investment instrument would attract a great deal of attention in most Montana communities. Conversely, local government officials rarely receive recognition for their efforts, even when their efforts are exemplary. While we do not suggest elected officials should base investment decisions on reaction of the local media, the point is that consequences of trying to maximize the return on investments may not be worth associated risks.
It is quite common for local officials to receive phone calls from investment firm representatives promising attractive rates of return on their investments. The representative may or may not understand the investments they are trying to sell or their inherent risks. Even more likely, the investment representative will not know which types of investments are permissible for Montana local governments. Unfortunately, some finance officials have
fallen victim to illusions of earning high rates of return for their taxpayers and invested public funds in risky investments that have resulted in substantial losses to their local government.
One unnamed author wrote:
Imagine the following two scenarios:
1. The city clerk‐treasurer, through his/her diligent cash management efforts, increased the city’s investment earnings from $30,000 per year to $40,000 per year; or
2. The city clerk-treasurer, in an attempt to increase the city’s investment income, invested the city’s funds in an illegal investment instrument. The investment is in default and it is likely the city will lose the original principal amount of $10,000.
Which of the two preceding events would result in a headline in the local newspaper? Quite obviously, the prospect of a city or town losing money by investing in an illegal investment instrument would attract a great deal of attention in most Montana communities. Conversely, local government officials rarely receive recognition for their efforts, even when their efforts are exemplary. While we do not suggest elected officials should base investment decisions on reaction of the local media, the point is that consequences of trying to maximize the return on investments may not be worth associated risks.